The Federal Open Market Committee also said inflation is currently running below its target and sounded more glum on its growth outlook, laying the groundwork for further asset purchases, or another leg of so-called quantitative easing..Read story on Fed decision.

Quantitative easing is considered by many economists as akin to printing money and therefore weakens a country’s currency.

“The biggest change in their language was their comments about inflation,” said John Derrick, director of research for U.S. Global Investors. “They definitely implied some policy action will be coming soon.”

Having the Fed expand its balance sheet “would be bad for the dollar but help insure the economy against a true deflationary period,” Derrick said.

As expected, the Fed didn’t change its target interest rates .

Earlier, the dollar failed to get some support after a report said U.S. housing starts rose 10.5% in August, much more than anticipated but mostly due to a rise in multi-family units. Read about U.S. housing starts.

Irish bond auction

The euro had found support earlier as investors showed solid demand for Ireland’s debt auction.

The single currency stood near its intra-day high as Ireland’s National Treasury Management Association said it sold 1.5 billion euros ($2 billion) of government debt, the maximum amount on offer. Read about Ireland’s bond sale.

The auction, which received interest for far more debt than was being sold, helped ease worries in credit markets over euro-zone sovereign debt.

Pressure on the euro also reflected gains in peripheral euro-zone bond yields, led by Ireland, as well as wider spreads in credit default swaps over the fiscal implications of Ireland’s banking crisis.

U.K. pound, Japanese yen

In the U.K., sterling
GBPUSD, +0.0400%
traded at $1.5619, recovering after being lower earlier and jumping after the Fed decision from $1.5549 late Monday.

The Office for National Statistics on Tuesday said that the public-sector borrowing requirement in August was 15.3 billion pounds ($23.8 billion), compared to £13.5 billion in August 2009. Economists had forecast a gap of £13 billion.

The figure was the highest on record for the month of August.

“Overall, this report should serve as a more-than-gentle reminder of the need to arrest the pace of increase in current expenditure and, due to increased interest-rate costs, the difficulties that will be encountered during this process,” said Stuart Green, economist at HSBC.

Against the Japanese yen, the dollar
USDYEN
briefly spiked lower then bounced back to ¥85.07, still down from ¥85.80 Monday.

“The question for traders is at what level the Bank of Japan may step back into the market in meaningful size to counter further crawling strength of the yen,” wrote strategists at FxPro. Soma analysts think Japanese officials want to keep the dollar at around ¥85, they said.

But the lack of any notable intervention in the last week has been taken as a sign that officials don’t actually want the yen to weaken, just not let it strengthen more, said Andrew Wilkinson, senior market analyst at Interactive Brokers.

“The absence of the Bank of Japan at current levels has been taken as a sign that the line in the sand stands at around ¥83 and that the authorities will act to defend rather than to attack,” he said. “The market might now start gently pushing back to see if the original battle line remains intact or is somewhat nearer.”

The Bank of Japan may also be waiting for the Fed decision before intervening further, if it’s thinking about it, because quantitative easing from the Fed would quickly negate any effect of Japan selling yen, said Dan Cook, senior market analyst at IG Markets.

“Let’s face it, the estimated $20 billion put into the market by the BoJ last week is about equivalent to the lint that falls out of the pocket of the Fed when they decide to spend money,” he wrote in a note Tuesday.

But since the Fed didn’t begin quantitative easing, “the Bank of Japan may have room to maneuver and try to once again push the yen closer to the ¥90 level without fear of a Fed action taking away any of the benefits,” Cook said.

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